The Tax Hike Cometh

When millions of America‘s “evil rich” fill out their income tax forms over the next several weeks in preparation for the April 15 filing deadline, they may he in for a big surprise: a hefty bill. That means all you robber barons pulling down $115,000 per year or more, or $140,000 or more including your spouse’s income.

If you neglected to readjust your income-tax withholding following passage of last year’s biggest-in-history, retroactive-to-January 1993 tax hike, expect to get hammered.

Think about it. Hiking the income-tax rate from 31 percent to 36 percent for people earning $115,000 or more is bad enough. But pushing it to 39.6 percent (42.5 percent including the increase in Medicare payroll taxes) for those with incomes above $250,000 is even worse.

And by making the increase retroactive, the administration (inadvertently or not) has ensured that many successful Americans-executives, doctors, attorneys, investors, business owners, and other professionals-will owe big bucks at tax time. Any of these individuals who didn’t take the trouble to send extra money to the IRS the last four months of 1993 is going to be writing Uncle Sam a check for thousands of dollars. Fortunately, the IRS will allow you to pay the additional taxes on the installment plan.

Consider the example of a family with $200,000 in taxable income. If income was withheld on the basis of a 31 percent top rate-as existed before the Clinton tax hike was approved-and additional income wasn’t withheld after the tax change, the family will owe Uncle Sam an additional $3,000. And this retroactive tax bite won’t just hurt the living: It even applies to the dead in the form of retroactive estate taxes.

Now, if your accountant has been watching out for you, you may be lucky: You only get slapped with the largest increase in tax rates since the days of Herbert Hoover. According to Business Week, if you’re the “average” CEO, you earned some $984,000 in salary and bonuses in 1992, excluding stock options and dividends. If we assume taxable income in the neighborhood of $900,000, this means you will pay roughly $80,000 more to Uncle Sam in 1993-enough to buy a couple of new cars or pay tuition for the kids.

And when the economy stalls again, or takes another dip, you’ll be caught again-as your company’s sales and earnings fall. After all, the economy has taken a dive following every major tax hike in the 20th century. There’s no reason to believe it won’t do the same this time.

My colleague, Daniel Mitchell, has come up with an even more interesting way to show the impact of the Clinton tax hike on successful Americans, and he has pointed out some discomforting political implications of the deal.

Some months ago, Mitchell filed a Freedom Of Information Act request with the U.S. Treasury Department to obtain data showing the impact of the Clinton tax increase by state and congressional district. After months of denying that any such report existed, the Treasury Department finally succumbed to pressure from Capitol Hill and granted Mitchell’s request.

The report should prove especially interesting to business executives, many of whom live in the areas hardest hit by the tax hike. It not only identifies which states and congressional districts will bear a disproportionate burden of the tax increase, it also indicates that many of the lawmakers representing those states and districts voted in favor of the tax hike. In other words, many lawmakers representing communities with large numbers of financially successful constituents voted against the interests of those constituents.

Look at New York Rep. Carolyn Maloney, a first-term congresswoman representing the 14th Congressional District, covering Madison Avenue, Park Avenue, GramercyPark, and other areas of Manhattan‘s Upper East Side. Maloney voted for the Clinton tax bill, even though it will take nearly $3 billion in additional income and Medicare taxes out of her constituents’ pockets over the next five years.

Similarly, residents of Scarsdale in Westchester County, NY, can thank Rep. Nita Lowey for the extra $1.4 billion they will pump into federal coffers over the next five years. Residents of New York‘s Central Park West neighborhood will pay $1.5 billion over five years, thanks to Rep. Jerrold Nadler. On Long Island‘s NorthShore, residents of Glen Cove, Manhasset, HuntingtonBay, and LocustValley can thank Rep. Gary Ackerman for their $1.2 billion bill.

Moving south, we encounter one of the more interesting examples: first-term Rep. Marjorie Margolies-Mezvinsky. She won the election in the 13th district in suburban Philadelphia, including the bedroom community of Bryn Mawr, with a tight 50.3 percent of the vote. Margolies-Mezvinsky achieved some notoriety last year when she reversed her opposition to the Clinton tax hike and cast one of the deciding votes for the bill. The payoff: Because her district contains the 14th-highest number of taxpayers subject to the tax increase (out of 435 districts), her constituents will send an extra $1.2 billion to Uncle Sam over five years.

On the other side of the country, 10-term Rep. Henry Waxman represents California‘s 29th district, which includes Beverly Hills. The Clinton tax hike, which Waxman supported, will cost 22,714 of his constituents an average of more than $20,000 annually in additional taxes over five years for a total of nearly $2.3 billion. Then there are the states hurt most by the Clinton tax hike. Connecticut tops the list with almost 39,000 residents who earn enough to be subject to the new 39.6 percent tax rate-a higher proportion of its total population than any other state. Many of these unfortunates are New York executives. The income and payroll tax increases approved last year will suck more than $4 billion extra out of Connecticut‘s economy during the next five years, an average of $1,175 for every man, woman, and child-and more than twice the national median. Given that a state income tax was imposed for the first time in its history last year by Gov. Lowell Weicker, it’s no wonder Connecticut‘s economy still remains stalled.

New Jersey ranks second on the list. It will pay more than twice the national median in additional taxes this year. Sen. Bill Bradley voted yes. Sen. Frank Lautenberg voted no.

Most puzzling of all is Sen. Daniel Patrick Moynihan’s vote in favor of the tax hike. The chairman of the Senate Finance and Banking Committee had plenty of time and opportunity to protect the interests of his constituents. Yet, not only did he vote for the bill, which will make New York $15.3 billion poorer over five years, Moynihan actually crafted the provisions raising the income and payroll taxes.

And why did Reps. Jane Harman and Lynn Woolsey of California, and Barney Frank of Massachusetts vote for the Clinton tax hike, even though their districts were the 21st, 26th, and 27th hardest hit out of the 435 congressional districts? After all, members of Congress love to brag when they can claim credit for bringing $10 million government contracts to their districts. Why did these and other lawmakers vote in favor of a bill that takes large sums of money from their constituents and hands it over to the bureaucrats in Washington? Why did they support a tax increase that will remove some $731 million to $1.1 billion from their districts’ pockets over the next five years?

Lawmakers from Florida, for instance, rarely vote for legislation that adversely affects senior citizens. And elected officials from agricultural regions rarely vote to reduce farm subsidies. Voting the interests of constituents seems the rule rather than the exception on most issues, but not for income-tax legislation.

Part of the reason may be secrecy: Mitchell says that until the government complied with his FOIA request, members of Congress could soft-pedal the impact of the tax increase on their constituents. Now that the information is available, they can run, but they can’t hide.

Whatever the reason, it doesn’t make sense to take resources out of the economy for the sake of “deficit reduction,” when those resources will be used to increase federal spending, while reducing the size of our pocketbooks. Remember: George Bush, who should have known better, made a tax-hiking deal with Congress in 1990 to reduce the deficit. The higher taxes didn’t bring as much as expected into federal coffers, Congress passed spending programs as if they did, and the economy slid into a recession. Now we have a president who doesn’t know any better than to raise taxes, and members of Congress who vote to raise them, even though it might hurt them politically.

The rich will manage, because they have the wherewithal to protect themselves in various ways from higher taxes. But Clinton‘s “soak-the-rich” scheme will devastate the middle class and the working poor, who likely will go down with the sputtering economy. Apparently Congress doesn’t mind, as long as its members can say their tax increase only affected “the rich.”

Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, DC-based public policy research institution. He also serves on the boards of several other foundations and research institutes. Dr. Feulner is the author of “Conservatives Stalk the House.”